Credit union

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A branch of the Coastal Federal Credit Union in Raleigh, North Carolina CoastalFederalCreditUnion-CreedmoorBranch.jpg
A branch of the Coastal Federal Credit Union in Raleigh, North Carolina

A credit union is a member-owned financial cooperative, controlled by its members and operated on the principle of people helping people, providing its members credit at competitive rates as well as other financial services. [1] [2]

Contents

Worldwide, credit union systems vary significantly in terms of total assets and average institution asset size, ranging from volunteer operations with a handful of members to institutions with assets worth several billion U.S. dollars and hundreds of thousands of members. [3] In 2018 the number of members in credit unions worldwide was 274 million, with nearly 40 million members being added since 2016. [4]

Commercial banks engaged in approximately five times more subprime lending relative to credit unions leading up to the financial crisis and were two and a half times more likely to fail during the crisis. [5] American credit unions more than doubled lending to small businesses between 2008 and 2016, from $30 billion to $60 billion, while lending to small businesses overall during the same period declined by around $100 billion. [6] In the US, public trust in credit unions stands at 60%, compared to 30% for big banks. [7] Furthermore, small businesses are eighty percent less likely to be dissatisfied with a credit union than with a big bank. [8]

"Natural-person credit unions" (also called "retail credit unions" or "consumer credit unions") serve individuals, as distinguished from "corporate credit unions", which serve other credit unions. [9] [10] [11]

Differences from other financial institutions

Credit unions differ from banks and other financial institutions in that those who have accounts in the credit union are its members and owners, [1] and they elect their board of directors in a one-person-one-vote system regardless of their amount invested. [1] Credit unions see themselves as different from mainstream banks, with a mission to be "community-oriented" and "serve people, not profit". [12] [13] [14]

Credit unions offer many of the same financial services as banks but often use different terminology. Typical services include share accounts (savings accounts), share draft accounts (checking accounts), credit cards, share term certificates (certificates of deposit), and online banking. Normally, only a member of a credit union may deposit or borrow money. [1] Surveys of customers at banks and credit unions have consistently shown significantly higher customer satisfaction rates with the quality of service at credit unions. [15] [16] Credit unions have historically claimed to provide superior member service and to be committed to helping members improve their financial situation. In the context of financial inclusion, credit unions claim to provide a broader range of loan and savings products at a much cheaper cost to their members than do most microfinance institutions. [17]

Credit unions differ from modern microfinance. Particularly, members’ control over financial resources is the distinguishing feature between the cooperative model and modern microfinance. The current dominant model of microfinance, whether it is provided by not-for-profit or for-profit institutions, places the control over financial resources and their allocation in the hands of a small number of microfinance providers that benefit from the highly profitable sector. [18]

Not-for-profit status

In the credit union context, "not-for-profit" must be distinguished from a charity. [19] Credit unions are "not-for-profit" because their purpose is to serve their members rather than to maximize profits, [17] [17] [19] so unlike charities, credit unions do not rely on donations and are financial institutions that must make what is, in economic terms, a small profit (i.e., in non-profit accounting terms, a "surplus") to remain in existence. [17] [20] According to the World Council of Credit Unions (WOCCU), a credit union's revenues (from loans and investments) must exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency. [20]

In the United States, credit unions incorporated and operating under a state credit union law are tax-exempt under Section 501(c)(14)(A). [21] Federal credit unions organized and operated in accordance with the Federal Credit Union Act are tax-exempt under Section 501(c)(1). [22]

Global presence

The directors of the Mulukanoor Women's Thrift Cooperative stand at the entrance to their credit union in Karimnagar district, Andhra Pradesh, India Credit Union in Warangal, India.JPG
The directors of the Mulukanoor Women's Thrift Cooperative stand at the entrance to their credit union in Karimnagar district, Andhra Pradesh, India

According to the World Council of Credit Unions (WOCCU), at the end of 2018 there were 85,400 credit unions in 118 countries. Collectively they served 274.2 million members and oversaw US$2.19 trillion in assets. [23] WOCCU does not include data from cooperative banks, so, for example, some countries generally seen as the pioneers of credit unionism, such as Germany, France, the Netherlands, and Italy, are not always included in their data. The European Association of Co-operative Banks reported 38 million members in those four countries at the end of 2010. [24]

The countries with the most credit union activity are highly diverse. According to WOCCU, the countries with the greatest number of credit union members were the United States (101 million), India (20 million), Canada (10 million), Brazil (6.0 million), South Korea (5.7 million), Philippines (5.4 million), Kenya and Mexico (5.1 million each), Ecuador (4.8 million), Australia (4.5 million), Thailand (4.1 million), Colombia (3.6 million), and Ireland (3.3 million). [23]

The countries with the highest percentage of credit union members in the economically active population were Barbados (82%), [25] Ireland (75%), Grenada (72%), Trinidad & Tobago (68%), Belize and St. Lucia (67% each), St. Kitts & Nevis (58%), Jamaica (53% each), Antigua and Barbuda (49%), the United States (48%), Ecuador (47%), and Canada (43%). Several African and Latin American countries also had high credit union membership rates, as did Australia and South Korea. The average percentage for all countries considered in the report was 8.2%. [23] Credit unions were launched in Poland in 1992; as of 2012 there were 2,000 credit union branches there with 2.2 million members. [26] From 1996 to 2016, credit unions in Costa Rica almost tripled their share of the financial market (they grew from 3.7% of the market share to 9.9%), and grew faster than private-sector banks or state-owned banks in Costa Rica, after financial reforms in that country. [27] :70

History

Friedrich Wilhelm Raiffeisen founded the first rural credit unions in Germany F.W.Raiffeisen.jpg
Friedrich Wilhelm Raiffeisen founded the first rural credit unions in Germany
A caisse populaire credit union in Levis, Quebec, circa 1920 Caisse populaire de Levis circa 1920.jpg
A caisse populaire credit union in Lévis, Quebec, circa 1920

Modern credit union history dates from 1852, when Franz Hermann Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch in the Kingdom of Saxony into what are generally recognized as the first credit unions in the world. He went on to develop a highly successful urban credit union system. [28] In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (now part of Neuwied) in Germany. [28] By the time of Raiffeisen's death in 1888, credit unions had spread to Italy, France, the Netherlands, England, Austria, and other nations. [29]

The first credit union in North America, the Caisse Populaire de Lévis in Quebec, Canada, began operations on January 23, 1901 with a 10-cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly C$5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a unique parish-based model for Quebec: the caisse populaire.[ citation needed ]

In the United States, St. Mary's Bank Credit Union of Manchester, New Hampshire, was the first credit union. Assisted by a personal visit from Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from Quebec on November 24, 1908. Several Little Canadas throughout New England formed similar credit unions, often out of necessity, as Anglo-American banks frequently rejected Franco-American loans. [30] America's Credit Union Museum now occupies the location of the home from which St. Mary's Bank Credit Union first operated.[ citation needed ] In November 1910 the Woman's Educational and Industrial Union set up the Industrial Credit Union, modeled on the Desjardins credit unions it was the first non-faith-based community credit union serving all people in the greater Boston area. The oldest statewide credit union in the United States was established in 1913. The St. Mary's Bank Credit Union serves any resident of the Commonwealth of Massachusetts. [31]

After being promoted by the Catholic Church in the 1940s to assist the poor in Latin America, credit unions expanded rapidly during the 1950s and 1960s, especially in Bolivia, Costa Rica, the Dominican Republic, Honduras, and Peru. The Regional Confederation of Latin American Credit Unions (COLAC) was formed and with funding by the Inter-American Development Bank credit unions in the regions grew rapidly throughout the 1970s and into the early 1980s. By 1988 COLAC credit unions represented 4 million members across 17 countries with a loan portfolio of circa half a billion US dollars. However, from the late 1970s onwards many Latin American credit unions struggled with inflation, stagnating membership, and serious loan recovery problems. In the 1980s donor agencies such as USAID attempted to rehabilitate Latin American credit unions by providing technical assistance and focusing credit unions' efforts on mobilising deposits from the local population. In 1987, the regional financial crisis caused a run on credit unions. Significant withdrawals and high default rates caused liquidity problems for many credit unions in the region. [32]

Stability and risks

Credit unions and banks in most jurisdictions are legally required to maintain a reserve requirement of assets to liabilities. If a credit union or traditional bank is unable to maintain positive cash flow and/or is forced to declare insolvency, its assets are distributed to creditors (including depositors) in order of seniority according to bankruptcy law. If the total deposits exceed the assets remaining after more senior creditors are paid, all depositors will lose some or all of their initial deposits. However, most jurisdictions have deposit insurance that promises to make depositors whole up to a maximum insurable account level. In the aftermath of the financial crisis of 2007–2008, there was a dramatic increase in the number of bank failures but not in the number of credit union failures, and in 2017, all depositors at failed credit unions were fully covered by deposit insurance, but depositors at a failed traditional bank were not covered by deposit insurance.

Corporate

Credit unions as such provide service only to individual consumers. Corporate credit unions (also known as central credit unions in Canada) provide service to credit unions, with operational support, funds clearing tasks, and product and service delivery.

Leagues and associations

Credit unions often form cooperatives among themselves to provide services to members. A credit union service organization (CUSO) is generally a for-profit subsidiary of one or more credit unions formed for this purpose. For example, CO-OP Financial Services, the largest credit-union-owned interbank network in the United States, provides an ATM network and shared branching services to credit unions. Other examples of cooperatives among credit unions include credit counseling services as well as insurance and investment services.[ citation needed ]

State credit union leagues can partner with outside organizations to promote initiatives for credit unions or customers. For example, the Indiana Credit Union League sponsors an initiative called "Ignite", which is used to encourage innovation in the credit union industry, with the Filene Research Institute. [33]

The National Association of Federally-Insured Credit Unions (NAFCU)is a national trade association for all state and federally-chartered credit unions. Based outside of Washington, D.C., NAFCU's mission is to provide all credit unions with federal advocacy, compliance assistance, and education.

The World Council of Credit Unions (WOCCU) is both a trade association for credit unions worldwide and a development agency. The WOCCU's mission is to "assist its members and potential members to organize, expand, improve and integrate credit unions and related institutions as effective instruments for the economic and social development of all people". [34]

The Credit Union National Association (CUNA) is a national trade association for both state- and federally chartered credit unions located in the United States. The National Credit Union Foundation is the primary charitable arm of the United States' credit union movement and an affiliate of CUNA.

Deposit insurance

In the United States, federal credit unions are chartered by and overseen by the National Credit Union Administration (NCUA), which also provides deposit insurance similar to the manner in which the Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to banks. State-chartered credit unions are overseen by the state's financial regulatory agency and may, but are not required to, obtain deposit insurance. Because of problems with bank failures in the past, no state provides deposit insurance and as such there are two primary sources for depository insurance – the NCUA and American Share Insurance (ASI), a private insurer based in Ohio.

In Canada, the majority of credit unions and caisses populaires are provincially incorporated and deposit insurance is provided by a provincial Crown corporation. For example: in Ontario, up to CA$250,000 of eligible deposits in credit unions are insured by the Financial Services Regulatory Authority of Ontario. [35] Federal credit unions, such as the UNI Financial Cooperation caisse in New Brunswick, [36] are incorporated under federal charters and are members of the Canada Deposit Insurance Corporation. [37]

See also

Related Research Articles

Cooperative Autonomous association of persons or organizations

A cooperative is "an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise". Cooperatives may include:

Federal Deposit Insurance Corporation US company providing deposit insurance

The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that provide deposit insurance to depositors in U.S. depository institutions, the other being the National Credit Union Administration, which regulates and insures credit unions. The FDIC is a United States government corporation providing deposit insurance to depositors in U.S. commercial banks and savings banks. The FDIC was created by the 1933 Banking Act, enacted during the Great Depression to restore trust in the American banking system. More than one-third of banks failed in the years before the FDIC's creation, and bank runs were common. The insurance limit was initially US$2,500 per ownership category, and this was increased several times over the years. Since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2011, the FDIC insures deposits in member banks up to US$250,000 per ownership category.

Microfinance provision of microloans to poor entrepreneurs and small businesses

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other branches. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient.

Desjardins Group Canadian association of credit unions

The Desjardins Group is a Canadian financial services cooperative and the largest federation of credit unions in North America. It was founded in 1900 in Lévis, Quebec by Alphonse Desjardins. While its legal headquarters remains in Lévis, most of the executive management, including the CEO, is based in Montreal.

National Credit Union Administration Independent federal agency of United States

The National Credit Union Administration (NCUA) is one of two agencies that provide deposit insurance to depositors in U.S. depository institutions, the other being the Federal Deposit Insurance Corporation, which insures commercial banks and savings institutions. The NCUA is an independent federal agency created by the United States Congress to regulate, charter, and supervise federal credit unions. With the backing of the full faith and credit of the U.S. government, the NCUA operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 111 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions. As of September 2016, there were 5,573 federally insured credit unions, with assets totaling more than $1.38 trillion, and net loans of $957.3 billion. The NCUA exclusively insures credit unions, whereas commercial banks and savings institutions are insured by the Federal Deposit Insurance Corporation.

A mutual, mutual organization, or mutual society is an organization based on the principle of mutuality and governed by private law. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship. A mutual organization or society is often simply referred to as a mutual.

Alphonse Desjardins (co-operator) Canadian businessman

Gabriel-Alphonse Desjardins, born in Lévis, Quebec, was the co-founder of the Caisses Populaires Desjardins, a forerunner of North American credit unions and community banks. For his contribution to the advancement of agriculture in the province of Quebec, he was posthumously inducted to the Agricultural Hall of Fame of Quebec in 1994

Canada Deposit Insurance Corporation

The Canada Deposit Insurance Corporation is a Canadian federal Crown Corporation created by Parliament in 1967 to provide deposit insurance to depositors in Canadian commercial banks and savings institutions. CDIC insures Canadians' deposits held at Canadian banks up to C$100,000 in case of a bank failure. CDIC automatically insures many types of savings against the failure of a financial institution. However, the bank must be a CDIC member and not all savings are insured. CDIC is also Canada's resolution authority for banks, federally regulated credit unions, trust and loan companies as well as associations governed by the Cooperative Credit Associations Act that take deposits.

Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of a financial system safety net that promotes financial stability.

A mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared among the members. The institution is intended to provide a safe place for individual members to save and to invest those savings in mortgages, loans, stocks, bonds and other securities and to share in any profits or losses that result. The members own the business.

Alterna Savings is a credit union founded in 1908 in Ottawa. It operates branches in Ontario and direct banking across Canada through its subsidiary Alterna Bank.

UNI Financial Cooperation collective of Francophone credit unions based in New Brunswick, Canada

Caisse populaire acadienne ltée, operating as UNI Financial Cooperation, is a Francophone credit union based in New Brunswick, Canada whose members are primarily Acadians. UNI's administrative headquarters are in Caraquet on the Acadian Peninsula.

Cooperative banking type of retail or commercial bank organized cooperatively

Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.

Credit unions are not-for-profit financial cooperatives. In the early stages of development of a nation's financial system, unserved and underserved populations must rely on risky and expensive informal financial services from sources like money lenders, ROSCAs and saving at home. Credit unions proved they could meet demand for financial services that banks could not: from professional, middle class and poorer people. Those that served poorer urban and rural communities became an important source of microfinance.

Bond of association

The (common) bond of association or common bond is the social connection among the members of credit unions and co-operative banks. Common bonds substitute for collateral in the early stages of financial system development. Like solidarity lending, the common bond has since played an important role in facilitating the development of microfinance for poor people.

The Province of Ontario Savings Office (POSO) was a financial institution established by the Government of Ontario, Canada in 1922 to provide a government-owned alternative to banks. The POSO was closed in 2003 when its assets were sold to the Quebec-based Desjardins Group cooperative of caisses populaires to form Desjardins Credit Union. In 2011, Desjardins Credit Unions in Ontario were transferred to Meridian Credit Union.

Credit unions in the United States

Credit unions in the United States served 100 million members, comprising 43.7% of the economically active population in 2014. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations. The clients of the credit unions become partners of the financial institution and their presence focuses in certain neighborhoods because they center their services in one specific community. As of March 2020, the largest American credit union was Navy Federal Credit Union, serving U.S. Department of Defense employees, contractors, and families of servicepeople, with over $125 billion in assets and over 9.1 million members. Total credit union assets in the U.S. reached $1 trillion as of March 2012. Approximately 236,000 people were directly employed by credit unions per data derived from the 2012 NCUA Credit Union Directory. As of 2019, there were 5,236 credit unions with 120.4 million of members, and deposits of $1.22 trillion.

Credit unions in Canada

Canada has significant per-capita membership in credit unions, representing more than a third of the working-age population. Credit union membership is largest in Quebec, where they are known as caisses populaires, and in western Canada.

H.R. 3584 (113th Congress)

H.R. 3584 is a bill that would amend the Federal Home Loan Bank Act to treat certain privately insured credit unions as insured depository institutions for purposes of determining eligibility for membership in a federal home loan bank. This change would make such credit unions "eligible for membership in the Federal Home Loan Bank System."

References

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Further reading